Getting Gold Wrong

More new highs for the Dow and S&P. Investors still hate stocks. But stocks don’t care…

Gold is a different story. After a decent start to the week, gold took it on the chin yesterday. It coughed up $35, coming to rest near $1,555. If you’ve paid close attention, this puts the yellow metal in the crosshairs of our danger zone. Any significant violation of this support could lead to a swift selloff.

But wait…

A Goldman note hit the Street early yesterday advising clients to short gold. It also includes a price target of $1,450. That’s not totally outrageous–but it is more than $100 lower than where we sit today.

As I read through the brief, I noted several similarities to my recent analysis.

I have told you many times that I’ve been skeptical of recent price action. I didn’t like how gold reacted to the Cyprus crisis. And I’ve also noted strong selling at key support levels. Despite piles of economic evidence saying gold should move higher, it couldn’t catch a bid.

But something about this Goldman report stinks…

Earlier this week, I wrote that it would be a good idea to get out of the gold ETFs and miners if you hadn’t already done so. I’m standing by that one. But this Goldman call for an outright short of gold itself is fishy–and I’m starting to rethink my strategy.

The short gold call is working now. Gold is at $1,560–and printed as low as $1,552 yesterday afternoon. But I’m still skeptical of how this plays out on a longer-term basis.

Here’s my gripe:

Why test the waters with a short selling recommendation now–after gold has fallen more than $250 from its October peak? What’s the motivation here? And more importantly, when is a report like this ever anything but a contrarian indicator?

Bottom line: you don’t want to be running hand in hand with Goldman when a report like this comes out. It might work initially, but it’s a good way to get burned. Don’t short gold.

Greg Guenthner
for The Daily Reckoning